Commentary on Political Economy

Wednesday, 9 November 2011

Schumpeter and "The 'Close'" of Bohm-Bawerk's System

[This is an excerpt from a much larger work on Max Weber's leitender Geist that I am preparing as one of the chapters of Krisis that follow the Nietzschebuch.]

The
“system of needs” can be satisfied best, most efficiently, rationally and
optimally, through the combination of industrial machinery, or means of
production, and of “free labor”. The Law
of Value as reformulated in the new marginal utility theory of the
Neoclassical Revolution represents the “scientific” specification by political
economy of the market price mechanism as the optimal system for allocating
existing scarce resources according to individual choices. The “machinery of
production”, the technologies adopted in the process of production, is
determined by the system of needs that “demands” its “rational and systematic”
utilization through bureaucratic rule so that its technically-determined
“output” or “supply” can be maximized to satisfy the “individual choices” as
fixed by the market price mechanism.

The “nature of the matter” is that from
the standpoint of the individual’s self-interest the new Economics
determines accurately the individual
contribution to the production of goods for final consumption (in Schumpeter’s
words quoted below, “the community has occasion to become conscious of the
economic value of its members to itself”), which is what “interests” the
“individual” ultimately, and what determines
the “value” and “distribution” or “allocation” of privately-owned social
resources between individuals in society:

Another application of this theory [marginal utility]
is the next step to a height

from which a wide view into the innermost working of
an economy

is gained. Means
of production are also complementary goods. But

[171] their values are not directly
determined: we value them only because

they somehow or other lead to consumers'
goods, and their value

can thus, from the point of view of the
subjective theory of value,

be derived only from the value of these
consumers' goods. But many

factors of production are always involved in the
production of a

single consumers' good, and their productive
contributions are seem-

ingly indistinguishably intermixed. In fact, before
Menger, one

economist after another thought it impossible to speak
of distin-

guishable shares of the means of
production in the value of the final

product, with the
result that further progress seemed impossible

along this route, and the idea of subjective value
appeared to be

unusable. The theory of the value of complementary
commodities

solves this seemingly hopeless problem. It enables us to speak of a

determinate 'productive contribution'
(Wieser) of such means of

production and to find for each of them
a uniquely determined

marginal utility, derived from its
possibilities of productive applica-

tion – that marginal utility which has
become… the basic concept of the modern theory of distribution and the
fundamental principle of our explanation of the nature

and magnitude of the incomes of economic groups. (JA Schumpeter, "Bohm-Bawerk" in Ten Great Economists)

The
incessant message of all bourgeois intellectual forces at this critical time in 1917 of
global conflict and in the face of the Bolshevik challenge and the spread of
revolutionary worker movements in Europe is
the futility or the impossibility of Socialism. “Rational
socialism” can amount to or end up in the identical system of production as
capitalism, with only a lot more bureaucracy and a lot less free choice. At the
very best, “rational socialism” could “minimize” the “frictions” of the market
mechanism, its “transaction costs” and the negative effects of “disturbances”
or “exogenous shocks”. At the worst, it would distort the “free individual
choices” made by “free labor” by removing the ability of “labor” to determine
“freely” the individual choices of workers, in such a way that “bureaucracy
would rule alone” and would no longer
be “kept in check” by private capitalism with its free market and free labour,
through the conflictual and “ir-reconcilable” self-interests! Alternatively,
were there to be no state bureaucracy, then free market capitalism would not be
able to maintain the “laws of free market competition” that determine
“scientifically” its optimal level of production for the satisfaction of
individual needs and wants understood as “self-interest”.

(185) We now approach the last step of the stairway
that takes us to

the top of Bohm-Bawerk's edifice . He was the first to
realize fully

the significance of the length of the period of
production in its two-fold aspect -

the aspect of productivity and that of
the lapse of time.

He gave both aspects their exact content and their
places in the

foundation of the system of marginal utility analysis.
He further

made the length of the period of production into a
determinant of

economic equilibrium, thus giving a sharply distinct
meaning to the

concepts of 'productivity,' 'economic period, ''flow
of goods'; and he

brought into the realm of analysis a rich multitude of
relationships

in economic life which are as yet far from exhausted.(JAS in “Ten Great Economists”)

Our proof shows further that, because only an agio on present

goods puts therelative demands of
present and future into proper

(183) balance with one another, the values of present and
future goods can-

not standat pareven in a socialist
community, that the value phenom-

enon which is the basis of the rate of interest cannot be
absent even

there, and hence demands the attention of a central
planning board.

From this it follows that even in a socialist society
workers cannot

simply receive their product, since workers producing
present goods

produce less than those who are employed on the
production of

future goods. Thus, whatever the community decides to do
with

the quantity of goods corresponding to that value agio,
it would

never accrue to the workers as a wage (but only as a
profit) even

though it were divided equally among them. This could
very well

have practical consequences whenever, for example, the
community

had occasion to become conscious of the economic value of
its mem-

bers to itself; in such a case it could assess the value
of a worker

only at the discounted value of his productivity, and
since all work-

ers equally able to work must obviously be evaluated
equally, a

'surplus value' must even here emerge which would appear as
an

income sui generis. (183)

Two corrections of the
idea of exploita-

tion are now also in
order: first, one can speak of 'exploitation' as a

cause of profit only in
the sense in which such exploitation would

occur also in a socialist
state; second, there is exploitation not
only

of labor, but also of land. For moral and political
judgment this is

of course irrelevant, since the socialist state would use
its 'exploita-

tive gains' in a different way; but it is all the more
important for

our insight into the nature of the matter.(183)

It
follows that Socialism may well be able to remove some of the “anarchical”
features of capitalism which preserve in large part the “free individual
choices” of “free labor”. But it would do so at the cost of removing in large
part that very “free consumer choice” and “free labor” that capitalism makes
possible! In no way whatsoever could Socialism prevent or abolish the
“separation”, the Trennung, of the
worker from the means of production – the source of the Marxian “alienation”,
of the ante litteram Lukacsian and Heideggerian “loss of totality”, “reification”
and “facticity” – because these are “technically necessary” aspects of the
efficient utilization of resources for the satisfaction of the system of
individual “conflicting and irreconcilable” individual wants and needs!

There
is not and there cannot be a “capitalist” economy and a “socialist” economy:
these are only formal differences in “ownership” of the means of production
that must give rise in any case to
the “separation” of all workers, individually and collectively, from control
over their work in favour of a technocratic “bureaucracy” for the sake of the
paramount technical and rational “efficiency” of production and the paramount
satisfaction of “the system of needs”, of “the iron cage”! There can only be one Economics, one “economic science”: the time for “Political Economy” is past because politics cannot determine the
rationally calculable technical efficiency of industrial production and its
utilization of resources.

Theoretically
more important, however, is the

result
- to use a terminology that has become accepted in treatments

of
this topic – that the rate of interest is a purely economic and not

a
historical or legal concept.(183)

This is the task and the supreme
achievement of capitalism as a mode of production based on “free labor” that it
“organizes” for the maximization of individual utilities. Its ultimate aim is
the efficient production of consumption goods, not just for the present but
also for the future, in accordance with the conflicting subjective valuations
(needs and wants) of self-interested individuals!

In applying this 'theory of imputation' (Wieser), which
owes

to Bohm-Bawerk one of its most perfect formulations, we
arrive at

the law of costs as a special case of the law of marginal
utility. As a

consequence of the theory of imputation, the phenomenon
of cost

becomes a reflex of subjective
value, and the law of the equality of

the cost and the value of a product is derived from the
theory of

value – never in
our science has there been a more beautifully closed

chain of logic.

But all this so far still refers only to the world of
values. That

All of its forms express themselves also in the mechanism
of the ex-

change economy can be shown only by a corresponding
theory of

price. Bohm-Bawerk therefore turns to price theory,
developing the

implications of the
law of value for the behavior of buyers and

sellers, and his investigation culminates in that
celebrated proposi-

[172] tion (for the case of bilateral competition) which
has since become

'historic':' The level of price is determined and limited
by the level

of the subjective valuations of the two marginal pairs' -
i.e .on the

one hand by the valuations of the 'last' buyer admitted
to purchase

and of the seller who is the 'most capable of exchanging'
among the

ones already excluded from the exchange, and on the other
hand by

the valuations of the seller 'least capable of
exchanging' among those

still admitted to the exchange and of the 'first'
excluded buyer.

All this is developed first for the situation with given
quantities of

exchangeable commodities with the conclusion that, since the

forces operating on the
supply side of the market are the same as

those operating on the
demand side, the old 'law of demand and

supply' turns out to be
simply a corollary of the law of marginal

utility. This is then
extended to the case of the formation of the

prices of commodities
whose available quantities can be varied by

production.

In
reviewing the theoretical masterpiece of his Viennese mentor, Schumpeter
remarks first on “the beautifully closed chain of logic” of Bohm-Bawerk’s
elaboration and extension of marginalist theory – forgetting in the process
that it was precisely the attempt by Karl Marx of closing his “system” by “trans-forming values into prices” that had
led him to accuse the German theoretician of indulging in “metaphysics” in the
appropriately named article “The ‘Close’ [Abschluss] of Karl Marx’s System”!
Schumpeter is unable to see that the “metaphysics” of the socialist and Marxian
“labor theory of value” have now become the “metaphysics of neoclassical
marginal utility”! It is precisely the attempt to identify and define a “Law of
Value” that leads to the “impossibility”, outside of “meta-physics”, of
“quantifying mathematically” what are inextricably social relations of production!

Already
in 1911, Schumpeter had celebrated at the very beginning of chapter two of the Theorie the advent of the Weberian Rationalisierung as the “overcoming”
(Uberwindung) of “metaphysics” and the triumph of “empirical science” – totally
mis-comprehending yet again the Nietzscheandenotations of the word as applied by
Weber. What Schumpeter overlooks in his Machian exultance is the
evident and dramatic “conflict” that Bohm-Bawerk’s theory contains and exudes!For behind Bohm-Bawerk’s “scientistic”
and lucid exposition lies all the explosive conflict of capitalist society even at the level of market pricing
according to consumer choice – according to “marginal utility”! However
much the “different subjective valuations” of goods on the market may be based
on “fair and equal exchange” on the market, the terrifying fact remains that
the self-interests of the “individual market agents” is determined through the
sheer violence of “imposition” of their subjective, egoistic choices and
preferences!

The level of price is determined and limited by the level

of the subjective valuations
of the two marginal pairs' - i.e .on the

one hand by the valuations of the 'last' buyer admitted to purchase [!]

and of the seller who is the 'most capable of exchanging'
among the

ones already excluded
from the exchange, and on the other hand by

the valuations of the seller 'least capable of exchanging'
[!] among those

still admitted to the exchange and of the 'first' excluded buyer.

The full conflict and sheer violence of
the market mechanism is made evident here in all its stark nakedness! It is
“futile” to seek recourse to “the beautifully closed logic” of the Neoclassical
theory reformulated by Bohm-Bawerk: the
inescapable fact remains that even behind the most “beautiful and elegant
equations” there is all the ineluctable conflict
of what Weber will soon call with astonishing (Marxian!) insight “the
capitalist rational organisation of free labor”!

[F]or value to emerge, relative scarcity has to be added to
utility. With the

aid of a distinction between want categories (or want
directions)

and want intensities, and under careful consideration of
the factor

of substitutability, Bohm-Bawerk arrives(in Menger's
sense, and in

a way similar to Wieser's) at the law of decreasing
marginal utility

with increasing 'coverage' of wants within each category
- i.e. with

increasing quantities of
the commodity in the possession[!]
of an indi-

vidual. (169)

As Schumpeter quite uncritically reveals
and concedes with this summation, this “scientific-rational economic mechanism”
is still self-consciously dependent on the conflicting self-interests of
individuals and on their “historical or legal” acquisition of “possessions”
which determine both “the relative scarcity” of commodities as well as their
“increasing or decreasing quantities”! It follows inexorably, by definition,
that this “conflict” can never be in “equilibrium” and that contrary to what
Schumpeter claims above it can never be “a purely economic and not a historical or legal concept”! Quite
to the contrary, this “economic concept and process” instead must be “guided”
and “governed”! Enter Weber’s leitender
Geist.